"YouTube Can Be Very Profitable In The Near Future"

A few weeks ago, everyone agreed that YouTube was going to be a perpetual money pit.

Then, a week ago, Google said YouTube is coming along nicely and will soon be profitable.

Now everyone agrees that YouTube will soon be raking in money hand over fist.

Mark Mahaney of Citi called the CDN folks at RampRate to get their take on the latest consensus. They agree..

Mark's breakdown of the cost structure jibes with our own research. And the points about Google's cost advantages mirror Google's explanation for why lots of folks were wrong about YouTube.

We Held A Call "Can YouTube Really Be 'Very Profitable'" With CDN Experts From RampRate - On the call were Steve Lerner, Media Practice Director, and Alex Veytsel, Principal Analyst, at RampRate, a leading IT Services Sourcing firm. Steve and Alex discussed their recent findings on YouTube's network cost structure per RampRate's recent report, "YouTube: Google's Phantom Loss Leader," which can be found at www.ramprate.com.

As Context, We See 3 Broad Factors To YouTube's Profitability - 1) Level of ad monetization, which according to our proprietary tracking of the top 100 videos viewed, has been consistently around 40% over the last three quarters; 2) Advertising revenue share with content providers, which we guesstimate to be 50% to 75%; and 3) Network costs, which is what this report focuses on. The three specific takeaways from the call follow:

1. Three Major Network Costs Drivers For Online Video - 1) Paid Bandwidth, which includes agreements with National/local ISPs, is the largest cost, tho' RampRate noted that bandwidth costs have been dropping about 20% each year over the past 5 years; 2) Storage, which can now be rented or bought -- Storage for consumer offerings has become a commodity; & 3) Hardware, which can also be rented or bought at fairly economical prices today.

2. Peering Is YouTube's Main Cost Advantage - It is likely that YouTube is peering a substantial portion of its traffic and buying bandwidth from Tier 1 ISPs at very low prices. Video Websites, like YouTube, also cache content at the edge of the network in order to reduce lag time and offers minimal disruption to the ISPs. Finally, ISPs favor peering with YouTube as it makes the most economic sense for the ISPs, reduces network strain, and doesn't impact other users' service.

3. Other Online Video Companies Can Be Profitable - RampRate believes that the cost to deliver online videos should not be a major obstacle in achieving profitability. Bandwidth, CDN services, hardware & storage costs have come down significantly over the past few years, and should continue to drop over time. The biggest hurdle to profitability is attaining sufficient user and usage volumes, obtaining contracts for content rights, and monetizing against the video content.

Summary Takeaway - At the margin, we believe the assertion that YouTube can be "very profitable in the not too long distance future" is credible.